Economy: ISM Non-Manufacturing Index is up in September

The Institute of Supply Management’s (ISM) Non-Manufacturing Report on Business recovered some of its losses from its previous report, with a 1.7% gain from August to September.

The ISM’s index for measuring the sector’s overall health—known as the NMI—was 53.2 in September. And like the ISM Manufacturing index, a reading above 50 represents growth; August represents the ninth consecutive month the NMI has topped 50.

In the NMI, the most heavily focused-upon metrics were somewhat mixed in September. The Business Activity/Production Index at 52.8 was down 1.6% from August, and New Orders at 54.9 were up 2.5%. Employment was up 2.0% at 50.2.

“We are seeing a fairly strong report that gives us an indication that we are seeing some signs of stabilization,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “We will likely see some slow growth moving forward, but the key thing…is the employment index being up for the third time in the last five months.”

The fluctuation of the Employment index in recent months has created what Nieves called a “seesaw effect,” which has been a laggard on the NMI’s composite index (Business Activity/Production, New Orders, and Employment) over the last few years, going back to August 2008, when Employment was consistently over 50.

Until this happens again, there is unlikely to be a more meaningful uptick on non-manufacturing activity, said Nieves. And when the Employment index dips down, it is forced to start at a lower baseline point than before.

Despite the employment situation, Nieves maintains there is cause for optimism when it comes to future growth, including the “official” end of the recession, companies with cash on hand starting to build up confidence and start to make new investments into their businesses on the capital side and the human resources side.

The NMI’s Prices’ index came in at 60.1 in September, down 0.2% from August for an essentially flat month and on the heels of a 7.6% gain from July to August. With slower growth occurring in the most recent report, Nieves said it is important to realize these indices measure the rates of change, adding that prices are increasing month to month as long as the index remains above 50.

“With prices, we are seeing some which are market-based commodities going up, but it is not about pricing power, it is more about fuel and petroleum-based products and anything related to that increasing in cost,” said Nieves.

Gains in cotton prices, which are at their highest levels in about 30 years, are driving some of these increases in the textile industry, said Nieves, who added that copper is on the rise as well.

Inventories in the NMI fell 6.5% to 47.0 after five months of growth. Nieves said that if the decline in inventories were to meet Business Activity/Production (which was 52.8 in September) that as people and companies were more conservative they were burning off existing inventory to fill orders.

The reason for this, he said, is that the NMI’s Backlog of Orders fell 2.5% to 48.0 in September.

“This means to me that orders are being filled off of existing inventory, and the reason why Supplier Deliveries at 55.0% are slower correlates to the tight capacity environment in the trucking market, which has led to decreased cycle time and slower deliveries,” said Nieves.